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Noe11e_ch_11_FINAL.pptxChapter 11
Pay Structure Decisions
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Learning Objectives 1 of 2
LO11-1 List the main decision areas and concepts in employee compensation management.
LO11-2 Describe the major administrative tools used to manage employee compensation.
LO11-3 Explain the importance of competitive labor market and product market forces in compensation decisions.
LO11-4 Discuss the significance of process issues such as communication in compensation management.
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Learning Objectives 2 of 2
LO11-5 Describe new developments in the design of pay structures.
LO11-6 Explain where the United States stands on pay issues from an international perspective.
LO11-7 Explain the reasons for the controversy over executive pay.
LO11-8 Describe the regulatory framework for employee compensation.
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Introduction
Employer’s View
Pay is critical in attaining strategic goals.
Pay impacts employee attitudes & behaviors.
Employee compensation is significant organizational cost.
Employee’s View
Policies regarding wages, salaries & other earnings affect their overall income and standard of living.
Both level of pay & fairness compared with others’pay are important.
LO 11-1
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Equity Theory and Fairness 1 of 2
People evaluate the fairness of their situations by comparing them with those of other people.
People compare their own ratio of perceived outcomes (pay, benefits, working conditions) to perceived inputs (effort, ability, experience) to the ratio of a comparison other.
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Equity Theory and Fairness 2 of 2
A person (p) compares her own ratio of perceived outcomes O (pay, benefits, working conditions) to perceived inputs I (effort, ability, experience) to the ratio of a comparison other (o).
If p’s ratio () is smaller than the comparison other’s ratio (), then underreward inequity results. If p’s ratio is larger, then overreward inequity results.
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Table 11.2 Pay Structure Concepts and Consequences
| PAY STRUCTURE DECISION AREA | ADMINISTRATIVE TOOL | FOCUS OF EMPLOYEE PAY COMPARISONS | CONSEQUENCES OF EQUITY PERCEPTIONS |
| Pay level | Market pay surveys | External Equity | External employee movement; labor costs; employee attitudes |
| Job structure | Job evaluation | Internal Equity | Internal employee movement; cooperation among employees; employee attitudes |
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Developing Pay Levels 1 of 14
Market Pressures
Product Market Competition
Organizations must be able to sell their goods and services at a quantity and price that will bring a sufficient return on their investment.
Product market competition places an upper bound on labor costs and compensation.
LO 11-2
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Developing Pay Levels 2 of 14
Market Pressures continued
Labor Market Competition
Reflects the number of workers available relative to the number of jobs available.
If an organization is not competitive in the labor market, it will fail to attract and retain employees of sufficient numbers and quality.
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Developing Pay Levels 3 of 14
Employees as a Resource
Pay policies and programs matter.
Need to evaluate in terms of cost and the returns they generate – how they attract, retain, and motivate a high-quality workforce.
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Developing Pay Levels 4 of 14
Deciding What to Pay
Efficiency wage theory
Employees who are paid more than they would be paid elsewhere will wish to retain their good jobs.
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Under what circumstances do the benefits of higher pay outweigh the higher costs? According to efficiency wage theory, one circumstance is when organizations have technologies or structures that depend on highly skilled employees.
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Developing Pay Levels 5 of 14
Market Pay Surveys
Benchmarking – comparing an organization’s practices against those of the competition
Pay surveys require answers
Which employers should be included in the survey?
Which jobs are included in the survey?
If multiple surveys are used, how are all the rates of pay weighted and combined?
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To compete for talent, organizations use benchmarking, a procedure in which an organization compares its own practices against those of the competition.
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Developing Pay Levels 6 of 14
Market Pay Surveys continued
Rate ranges
Permit a company to recognize differences in employee performance, seniority, training, and so forth in setting individual pay
For some jobs, there may be a single rate of pay for all employees within the job.
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Developing Pay Levels 7 of 14
Market Pay Surveys continued
Key jobs and nonkey jobs
Key jobs are benchmark jobs.
Have stable content and are common
Nonkey jobs are unique to organizations.
Cannot be directly valued or compared through market surveys
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Key jobs (also known as benchmark jobs) have relatively stable content and—perhaps most important—are common to many organizations. Therefore, it is possible to obtain market pay survey data on them. Note, however, that to avoid too much of an administrative burden, organizations may not gather market pay data on all such jobs. In contrast to key jobs, nonkey jobs are, to an important extent, unique to organizations (and/or have content different from jobs in other organizations having the same title).
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Developing Pay Levels 8 of 14
Developing a Job Structure
Job Evaluation
Composed of compensable factors and a weighting scheme
Typically includes input from a number of people
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Job evaluation is an administrative procedure used to measure internal job worth.
Compensable factors are the characteristics of jobs that an organization values and chooses to pay for.
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Developing Pay Levels 9 of 14
Developing a Job Structure continued
The point-factor system
First, a priori weights can be assigned.
Second, weights can be derived empirically based on how important each factor seems in determining pay in the labor market.
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Developing Pay Levels 10 of 14
Developing a Pay Structure
Market survey data
Has the greatest emphasis on external comparisons.
Pay policy line
Combines information from external and internal comparisons is to use the pay policy line to derive pay rates for both key and nonkey jobs.
Does not use actual market rates.
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Pay policy line is a mathematical expression that describes the relationship between a jog’s pay and its job evaluation points.
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Developing Pay Levels 11 of 14
Developing a Pay Structure continued
Pay grades
Grouping jobs into pay classes
Each job within a grade has the same rate range
Permits greater flexibility in moving employees from job to job
Range spread is larger at higher levels
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Range spread is the distance between the minimum and maximum amount in a pay grade
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Developing Pay Levels 12 of 14
Conflicts Between Market Pay Surveys and Job Evaluation
Sometimes average pay for a job falls significantly above or below the policy line.
Supply and demand
Which positions are most central to dealing with critical environmental challenges and opportunities in reaching the organization’s goals?
Most organizations now emphasize external comparisons/market pricing
LO 11-3
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Developing Pay Levels 13 of 14
Monitoring Compensation Costs
Pay structure represents the organization’s intended policy, but actual practice may not coincide with it.
Grade compa-ratio = Actual average pay for grade/Pay midpoint for grade
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Compa-ratio is an index of the correspondence between actual pay and intended pay.
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Developing Pay Levels 14 of 14
Globalization, Geographic Region, and Pay Structures
Market pay structures can differ substantially across countries both in terms of their level and in terms of the relative worth of jobs.
Expatriate pay
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Figure 11.3 Net Earnings (after Taxes and Social Security Contributions) in Selected Occupations, Six World Cities
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The Importance of Process: Participation and Communication
Participation
Employee participation in pay decisions tends to be rare.
Line managers should be involved.
Communication
Has a large, independent effect on employees’ attitudes and behaviors.
Employees use different comparison standards.
Managers must explain pay structure to employees.
LO 11-4
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Challenges 1 of 8
Problems with Job-Based Pay Structures
May encourage bureaucracy
Reinforces a top-down decision making and information flow as well as status differentials
The bureaucracy may become a barrier to change
May not reward desired behaviors
Encourages promotion-seeking behavior but may discourage lateral employee movement
LO 11-5
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Challenges 2 of 8
Responses to Problems with Job-Based Pay Structures
Delayering and Banding
Delayering and banding offer fewer opportunities for promotion
Broad bands can lead to weaker budgetary control and rising labor cost
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Delayering reducing the number of job levels to achieve more flexibility in job assignments and in assigning merit increases.
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Challenges 3 of 8
Responses to Problems with Job-Based Pay Structures continued
Paying the person: Pay for skill, knowledge, and competency
Competency-based pay - if you want employees to learn more skills and become more flexible in the jobs they perform, you should pay them to do it
Skill-based pay
Increases workforce flexibility
Facilitates the decentralization of decision making to those who are most knowledgeable
Contributes to a climate of learning and adaptability and give employees a broader view of organization functions
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Skill-based pay is based on the skills employees acquire and are capable of using
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Challenges 4 of 8
Can the U.S. Labor Force Compete?
Instability of country differences in labor costs
Relative labor costs are very unstable over time
Influenced by currency rates, currency exchange hedging, and proximity to the U.S. market
LO 11-6
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Challenges 5 of 8
Can the U.S. Labor Force Compete? continued
Skill levels
Quality and productivity of national labor forces can vary dramatically
Lower labor costs may reflect the lower average skill level of the workforce
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Challenges 6 of 8
Can the U.S. Labor Force Compete? continued
Productivity
Labor cost per hour divided by productivity per hour worked
Gross domestic product
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Figure 11.4 Gross Domestic Product (GDP) per Person, Adjusted for Purchasing Power Differences, U.S. dollars
Jump to long description in appendix
SOURCE: OECD, OECD Statistics, http://stats.oecd.org, accessed April 19, 2017.
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Challenges 7 of 8
Can the U.S. Labor Force Compete? continued
Considerations other than labor cost
Location
Product development speed
Quick response to customers
Inventory levels
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Challenges 8 of 8
Executive Pay
Influence the organization’s performance
Set the culture of the organization
Long-term compensation is usually stock plans
The ratio of top-executive pay to that of an average worker is 280.
Trust gap
LO 11-7
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Table 11.11 Highest-Paid Executives
| Blank | TOTAL COMPENSATION |
| Sundar Pichai, Alphabet, Inc. (Google) | $100.5 million |
| Thomas M. Rutledge, Charter Comm., Inc. | $98.5 million |
| Dara Khosrowshahi, Expedia, Inc. | $94.6 million |
| Leslie Moonves, CBS | $69.6 million |
SOURCE: R. Lightner and T. Francis, “How Much Do Top CEOs Make?” Wall Street Journal, April 20, 2017
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Government Regulation of Employee Compensation 1 of 3
Equal Employment Opportunity
Title VII of the Civil Rights Act
Prohibits sex- and race-based differences in employment outcomes such as pay, unless justified by business necessity
Percent of women and non-whites in workforce is increasing
Significant differences in pay
Comparable worth – no legal mandate
LO 11-8
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Comparable worth is a public policy that advocates remedies for any undervaluation of women’s jobs (also called pay equity).
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Government Regulation of Employee Compensation 2 of 3
Equal Employment Opportunity continued
Executive Order 11246 prohibits race- or sex-based “systemic compensation discrimination”
2009 Lilly Ledbetter Fair Pay Act
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Government Regulation of Employee Compensation 3 of 3
Minimum Wage, Overtime, and Prevailing Wage Laws
1938 Fair Labor Standards Act (FLSA) establishes a minimum wage
Requires paying overtime after 40 hours in a week
The sharing economy
Exempt and nonexempt employees
Davis-Bacon Act of 1931 and the Walsh-Healey Public Contracts Act of 1936—require federal contractors to pay employees no less than the prevailing wages in the area
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Exempt employees are not covered by the FLSA. They are not eligible for overtime pay. Nonexempt occupations are covered and include most hourly jobs.
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Appendix of Image Long Descriptions
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Appendix 1 Figure 11.3 Net Earnings (after Taxes and Social Security Contributions) in Selected Occupations, Six World Cities
| BLANK | Department Manager, Industrial Sector, Metalworking Industry | Skilled Worker, Industrial Sector, Metalworking Industry |
| Beijing | $19,107 | $6,197 |
| Copenhagen | $72,099 | $45,202 |
| Mexico City | $14,581 | $8,856 |
| Mumbai | $16,200 | $5,045 |
| Munich | $87,211 | $36,324 |
| New York City | $142,500 | $47,000 |
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Appendix 2 Figure 11.4 Gross Domestic Product (GDP) per Person, Adjusted for Purchasing Power Differences, U.S. dollars
United States $56,066
Germany $48,908
Japan $40,737
Czech Republic $35,014
Korea $34,569
Mexico $17,894
China $14,388
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